Posted on 06/23/2002 8:16:59 AM PDT by Dog Gone
THE electric power business has come out of the closet. Enron, Reliant, Dynegy and other Houston-based energy firms have become household names in recent months, though not necessarily for the best of reasons. Terms such as transparency, round-trip trades, and "gaming the market" are now part of the journalistic lexicon. Electricity deregulation, which had been a sleeper public policy issue for years, is now the subject of heated debate in Washington and many state capitals.
Unfortunately, politicians of various stripes are using the Enron debacle and its aftermath as a stalking horse for unrelated agendas. Gov. Gray Davis of California is using the alleged misdeeds of energy traders to boost his re-election campaign, when the principal problem with California's power market was an ill-conceived deregulation program. Instead of working on a national energy plan, Congress is deposing Enron and Arthur Andersen executives and considering legislation to re-regulate the trading of all energy derivatives. And several states scheduled to implement retail competition in electric power this year have put these initiatives on hold while "problems" in the utility industry are sorted out.
It is also regrettable that virtually every power trader now is being portrayed as an Enron clone. But unlike Enron, which had few hard assets, Reliant, Dynegy and most other power traders own electric generating plants worth billions and report real earnings. In fact, Reliant is the second largest merchant power producer in the United States.
What's lost in all the noise about round-trip trading and creative accounting is the fact that the United States still faces a host of energy problems but has yet to come up with any viable solutions. For example, over the next two decades, the nation will need about 1,500 new electric plants to meet projected demand. Much of this new generation will be fueled by natural gas. But in the current environment, many of the nation's utilities and power companies are unable to raise money for new facilities, raising the risk of future power shortages. Calpine recently canceled 35 orders for natural gas turbines from General Electric and delayed the delivery of another 81. General Electric, which built 284 turbines last year for the U.S. market, will build only 150 this year.
To make matters worse, the stock prices and credit ratings of independent power producers -- the companies that have built most of the nation's new power plants -- have plunged since the collapse of Enron. Witness Dynegy, which laid off 6 percent of its work force last week. And disclosures about aggressive business and accounting practices in energy and other industries have made fund-raising even more problematic.
The upgrading of the nation's transmission grid is another challenge facing power companies and regulators. Otherwise, California-type electricity shortages may occur in other parts of the country in the near future. Absent a restoration of investor and lender confidence, the huge capital outlays required to complete the infrastructure required for a national power market will not be forthcoming and electric reliability will be impaired.
Nuclear power remains another unresolved energy policy issue. Though currently contributing about 20 percent of the nation's electricity supply, no new plants have been constructed or ordered since the late 1970s. As well, the battle over disposal of spent fuel at Yucca Mountain continues, with Nevada promising to fight the federal government all the way to the U.S. Supreme Court.
Finland and several other countries, recognizing that nuclear power is the most environmentally benign process for generating electricity while reducing dependence on costly imports, are proceeding to construct new plants. By contrast, America increases its dependence on imported energy month after month while nuclear power languishes and we lose our pre-eminence in this technology.
Perhaps the most serious consequence of the post-Enron climate is the lost momentum for deregulation and retail competition in electric power. Those politicians and consumer groups beating up on the power industry and clamoring for re-regulation fail to mention that inflation-adjusted electricity prices have decreased by 30 percent for residential customers and by 36 percent for industrial and commercial customers since deregulation began in the early 1990s. But with further deregulation on hold, consumers and businesses may pay higher prices than would otherwise be the case.
Ironically, Texas -- home to many of the "sinners" in the power industry -- is generally considered to have implemented the best deregulation plan in the nation and to be a model for other states. Texas has witnessed a smooth transition to a competitive retail market while at the same time adding to generating capacity and enhancing the overall reliability of the distribution system. Indeed, Texas has the potential to become a leading exporter of electricity to other states if, and when, the United States completes a national power grid and retail competition becomes a reality.
Deregulation can't work without power trading. As recently put by Pat Wood, current chairman of the Federal Energy Regulatory Commission and former chairman of the Texas Public Utility Commission, "Well-functioning power markets depend on three key elements: adequate infrastructure; clear and balanced rules that allow efficient trading among market participants; and effective market oversight." Congress should focus on the first element and leave the other two to FERC and the state PUCs.
If deregulation is to move forward, the power industry must rebuild trust among regulators and investors. Otherwise, capital will not flow where it is needed and consumers will remain skeptical about the benefits of competition in electricity.
Weinstein is director of the Center for Economic Development and a professor of applied economics at the University of North Texas in Denton.
I am available immediately.
Funny thing, though. I just did a search on monster.com. There is not one power plant startup engineer job listed in the entire united states.
The US needs new sources and more efficient use
of energy systems.
The Constitution authorizes the State Dept to do other things,
and the Patent Office should obey the Congress and allow citizens
to their inventions (per Article I).
Invent away.
Really?
Where do you think the gas is going to come from and at what price? Existing storage masks the fact that production is down and there is no sign the decline will stop. Adverse tax, environmental, and business policy at the state and federal level is destroying capital formation in this industry also and the consequence is that people are not drilling holes in the ground looking for gas at the bottom.
Moving unused existing gas here from Alaska or southeast Asia will have a real cost around $6.50 or $7.00 (not the $4.50 the LNG industry claims) and it will take a long time to get the facilities to move and use the gas in place.
What's lost in all the noise about round-trip trading and creative accounting is the fact that the United States still faces a host of energy problems but has yet to come up with any viable solutions.
On the one hand he rallies for "deregulation" so the crooks he described would come up with the solution on the other he wants the government (regulators) to come up with solutions.
(Texas') PUC staff suggests $7 million fine for Enron
the companies artificially created shortages on transmission lines by overscheduling power at certain times. Those companies were then paid to remove electricity from the state's power grid so other providers could meet their demand.The PUC report said Enron Power Marketing, or EPMI, a unit of Enron Corp., engaged in "enormous overscheduling" of power during a test of the deregulated market.
a fact the staff took into consideration in recommending the hefty fine. Lanford said other factors are the "egregiousness and repetition of the violations" and "previous history of violations."
Enron scheduled load more than 500,000 percent over its power needed to cover the demand in the north zone and more than 1,000,000 percent over its actual load for the west zone.
Reliant Energy Services earned $3.5 million by overscheduling power last summer.
There's an example of deregulation Texas style. Deregulation is at best a joke and at it's worst a scam on the captive rate payers.
We need 1500 additional plants in the country within the next 20 years. California is doing its best to make sure they're not built in their state or across the border in Mexico.
So, who's going to build them?
Coal-fired plants are the only way to currently meet demand. The same people who say we must lessen our dependence on foreign oil are many of the same that supported the Clinton administration making the largest reserve of high-grade coal in the world part of a "wildlife preserve".
If we are serious about ending this impending "crisis", Let us all encourage the Bush administration to reverse this idiocy and open up the vast coal fields and give incentives to companies to build more coal-fired plants.
A local inventor has developed a process for burning even high-sulpher content coal cleanly without the use of scrubbers.
See this story: http://www.tennessean.com/local/archives/02/06/18534925.shtml?Element_ID=18534925
I asked him what exactly he was saving the oil and coal for. The question floored him, and all he could eventually stammer out was that the question was absurd.
Very funny, even semi-intelligent since you think government regulators would actually "deregulate" themselves. .... But given the facts of phony deregulation, what else could you say?
Other industries have been successfully deregulated, and the power business will, too, unless enough ignorant people block it.
I remain skeptical of the "deregulation" panacea, not only because of the fincancial gymnastics by which Enron screwed their own stockholders, but also because the focus is merely on financial deregulation, not of the other burderns that are placed on various forms of power generation.
IMHO, even those companies that are innocent of Enron type misbehavior are still short-sighted in their investments. Natural gas is the "easiest" route to take because it is so clean-burning. But what happens in aggregate if, as a nation, we put all our eggs into the natural gas basket? (including automobile companies looking to replace gasoline engines with natural gas powere fuel cells?)
Additionally, many of the natural gas plants being built are smaller "peaker" units. While these may be financially "efficient" (minimal investment, maximum revenue charged at "peak" rates), they are still not as "efficient" as the very large "base-load" power plants which require a much larger investment initially.
Prior to the deregulation phenomena, the "public utility" model served our nation well for many, many decades. To date, deregulation has yet to prove itself. Yes we need more power plants, both to replace antiquated plants in addition to satisfying new demand created by growth. But what we need to emphasize are the large base-load plants: nuclear and clean-coal technologies. Not over-reliance on a slew of little natural-gas peaker units misapplied to base-load demand.
Reliant Energy Services earned $3.5 million by overscheduling power last summer.This is a substantial amount of money, but it's so little compared to the magnitude of the overall energy crisis that it makes me wonder what's going on here.
There's no way you can shift blame from Davis to energy companies unless you find profits that are substantial, not puny.
Dog Gone, I'm about to make a very small investment in Calpine. I remember you were broadly against it; could you summarize your reasons again? It seems to me that Calpine was unfairly tarred with the Enron brush, and so it should pop back up to a higher amount, say $20 or so from its current value of under $10. I have a great deal of respect for your judgement in these matters, so your ideas would be appreciated.
D
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